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By XE Market Analysis January 21, 2020 7:01 am
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    XE Market Analysis: North America - Jan 21, 2020

    The yen has attracted safe-haven demand amid rising concerns about the strain of coronavirus in China, which are being exacerbated by the approaching Lunar New Year holiday period in China, a period of heightened people travelling that risks accelerating the spread of contagion. If things turn critical, airlines and tourism would be at the forefront of economic victims, similar to the case of the SARS virus in 2003. USD-JPY, meanwhile, has put in its biggest daily decline since January 3rd, although still only of a 30-pip magnitude, in falling to a five-day low at 109.88, which puts in a little distance from the eight-month high the pairing saw last Friday at 110.28. AUD-JPY, EUR-JPY and other yen crosses also ground lower as the yen's safe-haven premium richened. The BoJ left monetary policy on hold while nudging up growth forecast on receding global risks (improved trade relations, less risk of oil-disrupting Mideast conflict), although trimming CPI forecasts, as had been widely expected. To note, the IMF trimmed global growth forecasts due to unexpected slowing in India and other developing-nation economies, which is an added worry in the context of the evolving coronavirus situation in China. Elsewhere, EUR-USD has continued to ply a narrow range near 1.1100, holding above the four-week low seen yesterday at 1.1076. Sterling rallied in the wake of UK employment data, which broke a run of sub-forecast data releases. Average household income rose 3.2% y/y in the three months to November, which is a tad above the median forecast for 3.1%, and while the unemployment rate remained unchanged at 3.8%, a 208k rise in employment, well up on the 110k median forecast and putting total employment at a new record high, grabbed attention. Cable rose by nearly 40 pips in printing a high at 1.3047. The move breached Monday's peak at 1.3013.

    [EUR, USD]
    EUR-USD has continued to ply a narrow range near 1.1100, holding above the four-week low seen yesterday at 1.1076. Bigger picture, EUR-USD has been trending lower since early 2018, dropping from levels near 1.2500 and posting a 32-month low at 1.0879 in early October, the current nadir of the trend. Momentum has faded with the Fed having backed out of its tightening cycle after hiking rates three times last year. The central bank has since been engaged in capping the repo rate, which has seen its balance swell by some 11% since last September. The ECB, meanwhile, remains entrenched in a policy wait-and-see mode.

    [USD, JPY]
    The yen has attracted safe-haven demand amid rising concerns about the strain of coronavirus in China, which are being exacerbated by the approaching Lunar New Year holiday period in China, a period of heightened people travelling that risks accelerating the spread of contagion. If things turn critical, airlines and tourism would be at the forefront of economic victims, similar to the case of the SARS virus in 2003. USD-JPY, meanwhile, has put in its biggest daily decline since January 3rd, although still only of a 30-pip magnitude, in falling to a five-day low at 109.88, which puts in a little distance from the eight-month high the pairing saw last Friday at 110.28. AUD-JPY, EUR-JPY and other yen crosses also ground lower as the yen's safe-haven premium richened. The BoJ left monetary policy on hold while nudging up growth forecast on receding global risks (improved trade relations, less risk of oil-disrupting Mideast conflict), although trimming CPI forecasts, as had been widely expected. To note, the IMF trimmed global growth forecasts due to unexpected slowing in India and other developing-nation economies, which is an added worry in the context of the evolving coronavirus situation in China. We have gone from bullish to bearish on USD-JPY, anticipating a relatively sustained wobble in richly priced global stock markets, which in turn would underpin the Japanese currency.

    [GBP, USD]
    Sterling has rallied in the wake of UK employment data, which broke a run of sub-forecast data releases. Average household income rose 3.2% y/y in the three months to November, which is a tad above the median forecast for 3.1%, and while the unemployment rate remained unchanged at 3.8%, a 208k rise in employment, well up on the 110k median forecast and putting total employment at a new record high, grabbed attention. Markets had been bracing for something worse in light of the uncertain economic period leading into the general election in mid December. The data, along with an expected post-election rebound in January PMI surveys (the flash version of which is due on Friday), strengthens our conviction that the BoE will refrain from cutting interest rates at its meeting tomorrow, as we see most MPC members wanting more time to assess the impact from the clearing of the fog of Brexit and political uncertainty in light of the election. Cable rose by nearly 40 pips in printing a high at 1.3047. The move breached Monday's peak at 1.3013. EUR-GBP concurrently dipped below its Monday low on route to a 0.8503 low. We expect the pound to hold up for now, but aren't bullish over the longer term, with Brexit and the possibility for a no-deal departure from the EU remaining on the table at the end of the year, along with the vista of the sheer magnitude of task the UK government has in undertaking multiple and simultaneous trade negotiations. Regarding the upcoming flash PMI released, the median forecast is for the composite headline to rise to 50.5 from December's 49.5 reading.

    [USD, CHF]
    EUR-CHF has remained heavy after hitting a 33-month low at 1.0731 on Friday. The franc rallied strongly last week following the logic-defying decision by the U.S. to add Switzerland to its list of currency manipulators earlier in the week. The U.S. move seems a bit rich given the franc is a demonstrably chronically-overvalued currency in purchasing parity terms (as illustrated by the Economist's Big Mac index). The U.S. argues that Switzerland needs a more expansive fiscal policy.

    [USD, CAD]
    USD-CAD lifted back above 1.3075 amid a broader bid for the U.S. currency in London trading, which is being seen as a safe-haven bid in light of concerns about the spreading coranavirus in Asia. A near 2.5% correction in oil prices from the high seen yesterday, with concerns about the supply outage in Libya having abated, provides another bullish ingredient for USD-CAD. The BoC meets on policy today. We expect the central bank to hold rates steady at 1.75%. The Monetary Policy Report will also be published, which will detail the bank's growth and inflation outlook. Our base case remains for no change in rates this year amid a steady outlook from the BoC.

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